Dilution

Mark Suster Partner Upfront Ventures and former entrepreneur

“The VC assumes [there will be] an option pool [] to hire and retain talent to grow [the] company. [] The more senior members [the company has], then the [fewer] options [needed] and vice versa. Industry standard post [the] first round of funding will be 15-20% [for the option pool]. [Suster] say[s] “post” funding because [one will] need more than this amount pre-funding to get to this number after funding. []

[It’s standard] that the VC wants the options includ[ed] before [he] funds [].” The option pool dilutes the founder’s percent ownership, not the investor’s. The option pool suffers the same percent dilution the founder suffers when a VC invests his money.

“Note that the term sheet [says “Pre-Money” valuation and nowhere does] the term sheet [say] “true Pre-Money” or “effective Pre-Money”– that’s for [the founder] to calculate.” True or effective pre-money is based on a lower price/share due to options increasing the number of shares incorporated in the calculation. The result is a lower true pre-money than pre-money, the latter which is also called “nominal” pre-money valuation. Mark Suster Want to Know How VC’s Calculate Valuation Differently from Founders, July 22, 2010; http://www.bothsidesofthetable.com/2010/07/22/want-to-know-how-vcs-calculate-valuation-differently-from-founders/